BofA Merrill Lynch Analysts Say Russia Could Attract Significant Investment and Expertise in Offshore Development by Following Brazil’s Example

MOSCOW--(BUSINESS WIRE)--Russia’s oil and gas industry stands to benefit significantly if the government decides to follow a simple roadmap established by Brazil, BofA Merrill Lynch Global Research wrote in a report to clients.

“We see inaction as the largest risk to developing offshore reserves in Russia. We do not believe that status quo on taxation or one-off tax breaks are enough to attract adequate investment to the industry”

Russia could become the next Brazil

The Russian government is currently preparing to review an offshore resource development program through 2030 in an effort to develop potentially significant oil and gas resources in the Arctic and Black Sea.

In the opinion of BofA Merrill Lynch Global Research, if the Russian state follows Brazil’s example in attracting investment and expertise to its offshore exploration and production, there would be large potential for reserve and production gains for Russia in offshore, substantial budget impact for the Russian state and large reserve re-rating impact for Russian companies.

Three simple steps

In the report, the BofA Merrill Lynch Global Research team highlighted the three simple steps established by Brazil to attract investment and expertise to its offshore development:

1. Allow private companies into licensing rounds for offshore reserves.

2. Encourage joint ventures with foreign partners and eventual foreign license ownership in offshore.

3. Introduce a comprehensive, clear and sustainable taxation regime for offshore licenses.

Russian state - nothing to lose, everything to gain

The Russian state has nothing to lose as offshore production is currently limited and is unlikely to start in earnest with restricted access to reserves and an onerous taxation regime. Based on Brazilian experience, BofA Merrill Lynch Global Research estimates that the Russian state can gain:

Additional 6 billion boe of 2P reserves.
Peak production of 1 million bbls from offshore.
Additional 4 percent annual contribution to the state budget.
Increase in valuation of Russian oil and gas companies.
Higher FDI and employment.

“If the Russian experience proves to be similar to that of Brazil, we could expect that offshore reserves in Russia will more than double in the next 15 years. Of course, many factors, including different geological characteristics, may lead to a different outcome. But this helps put the potential in Russia into perspective,” said Karen Kostanian, head of Emerging Europe, Middle East and Africa Oil and Gas Research.

“We see inaction as the largest risk to developing offshore reserves in Russia. We do not believe that status quo on taxation or one-off tax breaks are enough to attract adequate investment to the industry,” he added.

BofA Merrill Lynch Global Research

The BofA Merrill Lynch Global Research franchise covers more than 3,300 stocks and 1,000 credits globally and ranks in the top tier in many external surveys. Most recently, the group was named Top Global Research Firm of 2011 by Institutional Investor. The group was previously named No. 1 in the 2011 Institutional Investor All-Asia, All-China and All-Japan surveys, marking the first time a single institution simultaneously topped all three surveys. The group was also named No. 2 in the inaugural Institutional Investor Emerging Markets Equity and Fixed Income survey, covering Emerging Europe, Middle East and Africa; No. 2 in the 2011 All-Latin America and All-America Equity team surveys; and No. 3 in the 2010 Institutional Investor All-America Fixed Income, All-Brazil and All-Europe Research team surveys.

In addition, the group was ranked the No. 1 Pan-European firm for Equity Sectors Research and the No. 2 Pan-European firm for Equity and Equity-Linked Research in the 2011 Extel survey, both for the second consecutive year. The group was also the winner of the Emerging Markets magazine’s EM Research Global Award for 2010 and 2011.

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